Transformation of our business portfolio
The business environment for commodity petrochemicals in which the Mitsui Chemicals Group operates has entered a period of dramatic change. The significant decline in earnings that resulted from the 2008 global financial crisis has been followed by addition and expansion of commodity petrochemical plants as part of economic stimulus packages in China and other countries, the shale gas revolution in the US, and entry into downstream markets by Middle Eastern competitors. This has necessitated bold reform of our previous business structure, which was centered on the basic materials business.
Against this backdrop of changing business conditions, we have been pursuing transformation of our business portfolio, restructuring the Basic Materials domain that underpins our earnings base in combination with expanding the three target domains which are charged with driving growth: Mobility, Health Care, and Food & Packaging.
In an effort to reduce the susceptibility of the Basic Materials domain to fluctuations in overseas market conditions, we downgraded the size of our production capacity based on the principle of local production for local consumption, while also shifting from commodity products to differentiated products with the aim of securing a stable earnings structure. In the three target domains, we have expanded and newly installed production facilities in line with demand growth in order to establish a major earnings pillar for the Group.
As a result, earnings volatility in the Basic Materials domain has steadily declined, improving ROIC. Moreover, the combined share of invested capital in the three target domains has expanded from 35% of the Group total in fiscal 2008 to 50% in fiscal 2019. We also engineered a significant upturn in combined ROIC in the three target domains from -1% to 9% over the same period.
These efforts to transform our business portfolio also enabled us to improve our net D/E ratio, a key indicator of sound finances, from 1.44 at the end of fiscal 2013 to 0.76 at the end of fiscal 2019, creating a financial position to support further growth investment.
Cash flows and net D/E ratio
*Outlook as of the date of announcement for the 1st Quarter of FY2020 results.
In fiscal 2019, we began disclosing ROIC for each of our business segments to serve as a yardstick to quantitatively measure the transformation of our business portfolio. Under our basic policy of maximizing corporate value by enhancing capital efficiency (i.e., increasing the ROIC spread), we will continue pursuing a range of initiatives designed to accelerate this transformation.
For the three target domains, we are working to steadily recover previous investments, in addition to swiftly establishing a new growth model that leverages collaboration in Group resources and our ability to propose solutions. Moreover, in domains such as ICT and Health Care, we are actively investing to accelerate growth, also making use of M&As in areas where our capabilities are insufficient. For both types of investment, we will conduct strict screening of profitability by giving due consideration to the cost of capital while employing indicators such as IRR to secure ample returns.
In the Basic Materials domain, although we have succeeded in improving earnings volatility and ROIC compared to the past, we believe that further restructuring is necessary, as these levels are still short of our expectations. We will compile detailed plans during fiscal 2020 and execute them with the aim of further improving volatility and profitability.
While pursuit of these measures may require increases in interest-bearing debt from time to time, we will endeavor to keep our net D/E ratio and credit ratings* at current levels over the medium term as we aim to balance financial soundness and minimizing capital costs.
In order to facilitate understanding of these measures and the Group’s business position, we will continue to strengthen information disclosure and provide more opportunities to engage in dialogue with investors.
*Japan Credit Rating Agency, Ltd. (JCR): A+
Rating and Investment Information, Inc. (R&I): A
The impact of COVID-19
It is currently difficult to assess the likely impact of the COVID-19 pandemic on the global economy and corporate earnings up ahead. However, as measures against recession, we are reviewing costs in all areas with a view to achieving cost reductions of more than ¥3 billion, and also pursuing initiatives to secure cash, such as by reducing inventory sizes and enacting strict management of notes and accounts receivable.
In addition, we have also bolstered resistance to a further worsening in the environment by expanding our committed credit line to approximately ¥100 billion.
In investment areas too, we plan to push back execution of projects worth a total of around ¥13 billion, mainly non-urgent projects. However, we will steadily pursue investments and development that are necessary for our future growth.
Once the COVID-19 pandemic winds down, we anticipate many aspects of the world will have changed. As well as accommodating new ways of working, such as remote working, we intend to invest management resources to tap the new demand created by this different environment, including these new ICT-related trends and increased awareness of public health.
While the Mitsui Chemicals Group’s top priority is the enhancement of corporate value through business growth and expansion, we also see the return of profit to our shareholders as a key management priority.
Our basic order of priority for profit allocation is:
1) investment for the continuation and growth of business, 2) shareholder returns, and 3) reduction in interest-bearing debt. These allocations will reflect ongoing comprehensive evaluation of the Group’s financial situation, cash flows, and future earnings prospects.
Based on these policies, our approach to shareholder returns is to continue to pay stable dividends with due consideration given to DOE and other indicators, while also aiming to achieve a total return ratio of 30% or more by flexibly acquiring treasury stock depending on the share price and market conditions.
Flexible acquisition of treasury stock
Targeting shareholder returns of 30% or more
*1Mitsui Chemicals conducted a 5-to-1 share consolidation on October 1, 2017. Annual dividends per share have been adjusted retrospectively to reflect the share consolidation for all periods presented.
*2Mitsui Chemicals has voluntarily adopted International Financial Reporting Standards (IFRS) from FY2020. Figures for FY2019 and before are profit attributable to owners of parent under Japanese Generally Accepted Accounting Principles (J-GAAP).
*3Owing to the impact of COVID-19, dividends for FY2020 were “Undecided” at the time of FY2019 results announcement. Figures for FY2020 dividends and net income are forecasts as of the date of announcement for the 1st Quarter of FY2020 results.